It is a fundamental tenant of financial planning that you need to hedge against risk.  Investors are always cautioned to diversify their portfolios (i.e. have a mix of stock, bonds and cash).  Further diversify by investing in both U.S. and foreign companies.  As you age, become more conservative in your investing to hedge against risk.

With recent developments on climate change, many parallels exist between making decisions regarding regulations of greenhouse gases and financial planning.  Even if you are a doubter of climate change, most would acknowledge there is some risk that climate change is occurring and that humans are increasing the risk through emissions of greenhouse gases.  The following statement is from NASA regarding the degree of scientific consensus that climate change is caused by human activities:

Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are extremely likely due to human activities. In addition, most of the leading scientific organizations worldwide have issued public statements endorsing this position.

Intergovernmental Panel on Climate Change October 2018 Report

Back in 2016, the Intergovernmental Panel on Climate Change (IPCC) was commissioned to prepare a special report on the impacts of global warming over 1.5 degrees Celsius above pre-industrial levels.  In assessing the current global warming trends, the IPCC states the following in its report:

Human activities are estimated to have caused approximately 1.0°C of global warming
above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.

The IPCC issued a dire warning it its report.  Immediate action must begin to keep warning at a maximum of 1.5 Celsius by 2030.  If warming exceeds that level, the risk of drought, floods, extreme heat and poverty increases dramatically for millions of people.

Impacts are not just in remote corners of the globe.  The United States is already beginning to experience the risk associated with climate change.  The Global Change Research Act of 1990 mandated that the U.S. Global Change Research Program (USGCRP) deliver a report to Congress and the President.  The 4th National Climate Assessment (NCA4) was released on the heels of the IPCC report.  The report is the culmination of work by thirteen federal agencies, including NASA and the Defense Department, with contributions from 300 scientists. The report states the climate change impacts are already occurring in the United States.

National Geographic highlighted the risks discussed in the NCA4 report:

As the report makes clear, different parts of the country face different risks posed by climate change. In vulnerable Southeastern states, coastal flooding is projected to increase dramatically; Charleston, South Carolina, could experience 180 tidal floods in a year by 2045, compared to 11 per year in 2014. In the Southern Great Plains, extreme heat could cause thousands of premature deaths and billions in lost work-hours by the end of the century.

Drought conditions worsened the recent California wildfires.  Fortune reported that the recent California wildfires destroyed 6,700 structures.  The total cost to the state, homeowners and insurers is expected to exceed $19 billion.

The recent IPCC and NCA4 reports show the dramatic risk climate change presents.  If such risk is analyzed in a similar fashion to financial risk, prudent decision making would include taking appropriate steps to mitigate that risk.

U.S. Rolls Back Climate Change Regulations

The Trump Administration has rolled back climate change regulations and has announced its intention to remove the United States from the Paris Climate treaty.  Some of the climate change deregulation includes the following:

With regard to the NCA4 Report, as reported on VOX, President Trump even recently stated he “didn’t believe” the report prepared by his own federal agencies.  Even if the President doubts climate change or the likely impacts to the U.S. in the coming years, a prudent course of action calls for managing against the risk.

Even Those in the U.S. Who Still Question Climate Change Should Be Persuaded to Take Action

In discussing risk associated with your investment portfolio, Forbes comments “the higher the level of risk your portfolio has, the more likely you are to experience loss or injury, and the more significant that loss or injury may be.”  If you face greater risk, your financial advisor would counsel you to rebalance your investments to reduce your risk.

As discussed above International and U.S. governmental agencies warn the risk of significant impacts due to climate change are increasing dramatically.  According to U.S. EPA, the U.S. is the second largest emitter of greenhouse gases in the world.  As a result, the climate change risk profile to the U.S. EPA is severe.

Even for those conservatives that are concerned with the impacts to the U.S. economy from climate change regulation, the U.S. risk profile demands taking prudent action to reduce greenhouse emissions.

With headlines in the United States of intense wildfires out West and more frequent hurricanes hitting the Gulf and East Coasts, concern that the U.S. is already beginning to experience the impacts of climate change is growing.  While most recognize climate change is occurring, the debate over how to effectively address climate change by reducing greenhouse gas emissions rages on.

The Washington Post recently noted carbon taxes have been cited by the United Nations as, perhaps, the most efficient and effective tool to reduce greenhouse gas emissions:

The United Nations contends taxing carbon dioxide emissions is an essential component of halting a steady rise in global temperatures.  It was a key element of the world body’s major October report predicting Earth’s atmosphere may warm by up to 2. 7 degrees Fahrenheit over preindustrial levels as soon as 2040, potentially triggering a global crisis decades earlier than expected.

However, imposing new taxes also can have significant economic impacts, particularly on the middle and lower class.

Over the weekend, Reuters reported that Paris was the scene of some of the worst rioting France has seen in a generation.  One reason for the protests is a fuel tax imposed by the French government to combat climate change.  The fuel tax is one tool in an aggressive plan to reduce carbon emissions by 40 percent by 2030.  The purpose of the tax is put incentives in place to encourage less usage of fossil fuel powered vehicles and to create an incentive to convert to electric vehicles.

The protesters believe the fuel tax demonstrates that the French government caters to the rich and elite.  They believe the government does not understand that the fuel tax disproportionately impacts the lower and middle class.

U.S. Considers First Bi-Partisan Carbon Tax Bill 

The goal of a carbon tax is to impose a price on sources of greenhouse gas emissions in order to create an economic incentive to move toward more efficient and less polluting sources.  In the U.S., Congress has yet to act on any comprehensive climate change legislation.  That could change with the introduction of a bi-partisan bill that would impose a carbon tax.

In November, a five members of the House introduced the “Energy Innovation and Carbon Dividend Act” which would impose a tax on carbon.  As discussed in the Miami Herald, the goal of the proposal is to reduce greenhouse gas emission by 40 percent within 10 years with a 91 percent reduction by 2050.  The reductions would be achieved by initially charging $15 per metric ton of carbon emitted and increase the price by $10 every year.

However, unlike other proposals, that would use tax revenues to fund infrastructure or reduce the deficit, the Bill would return the revenue back to citizens in the form of a dividend to offset higher energy costs.  The Bill is similar to a proposal put forward by the Climate Leadership Council, led by former Republican Secretaries of State James A. Baker III and George P. Schultz.  The Climate Leadership Council proposal called for a $40 per ton price on carbon dioxide emissions with the price rising thereafter.  Citizens would receive rebates starting at $2,000 per year for a family of four.

In October 2018, the Climate Leadership Council released a new report titled “The-Dividend-AdvantageThe 10 Reasons Why Rebating All Carbon Fee Revenue Directly to the American People Offers the Most Popular, Equitable and Politically Viable Climate Solution”  Some of the 10 reasons include:

  • Returning revenues to citizens has the highest public support
  • Carrots trumps sticks- creating incentives to reduce emissions is better than mandates
  • Most equitable- avoids regressive taxes that put the burden on the least fortunate.

It is the last bullet point that ties directly to what is occurring in France.  The French Government has directed the revenues from its fuel tax to pay down the deficit rather than returning it to the citizens.  This means that the increased cost of fuel is being directly felt by the consumers at the pump.   The French Government defends the allocation of the tax revenues by stating that citizens need to be encouraged to do their part to reduce usage of fossil fuels.

The U.S. carbon tax proposal would address the concern that carbon taxes would disproportionately impact lower income Americans by increasing energy prices.  As the recent protests demonstrate, climate strategies must be properly balanced so as to not disproportionately impact citizens more vulnerable to prices and tax increases.  The French protests are a real world example of failing to account for those impacts.

The ruling in Upstate Forever and Savannah Riverkeeper v. Kinder Morgan Energy Partners, LP expands the rights of citizens groups to bring suits for penalties and injunctive relief under the Clean Water Act even when a state EPA is actively involved in addressing the issue.  Furthermore, the court ruling allows claims to be brought even when the original spill ceased and all that remains is ongoing migration from a historical spill.

Factual Background

Back in 2014, a leak occurred in the Plantation Pipe Line which runs from Louisiana to Washington, D.C.  The leak resulted in the discharge of gasoline and petroleum below ground.  While the leak was repaired quickly, cleanup has been ongoing for a number of years.  The cleanup has been supervised by the South Carolina Department of Health and Environmental Control (SCDHEC).  In 2016, environmental groups brought suit claiming the cleanup has been inadequate to prevent migration of pollution into nearby waterways.

Issues Presented

The suit raised a number of important issues:

  • Typically, where state or federal regulators have taken affirmative action to address a violation, such regulatory action bars citizens from bringing suit. Why not here?
  • When a spill has stopped do citizen groups still have authority to assert a claim?
  • Does subsurface pollution that migrates to waterways fall within the scope of the Clean Water Act as a prohibited discharge
    • The Clean Water Act regulates “point source” discharges which are “any discernible, confined and discrete conveyance,” including pipes, ditches, channels and tunnels. 33 U.S.C. § 1362(14)

Fourth Circuit Rules the Environmental Groups Could Bring Suit

The Court did not directly address the extent of state involvement in the cleanup.  However, the cleanup was only being performed in accordance with “guidance” from the SCDHEC, not under a formal judicial consent order which would bar a subsequent citizen’s suit.  While the Company was working with state regulators to cleanup the spill, the State never took formal enforcement to cutoff citizen suits.

The Court ruled the spill was not a “wholly past violation.”  While the pipeline was fixed, the spill left contaminants in the ground that were still migrating to nearby waterways.  The Court found that the pipeline was a point source and even though the pipeline was repaired, ongoing violations were occurring due to migration of contamination to waterways from the original spill. The Court held:

“The CWA’s language does not require that the point source continue to release a pollutant for a violation to be ongoing. The CWA requires only that there be an ongoing ‘addition… to navigable waters,’ regardless whether a defendant’s conduct causing the violation is ongoing.”

The Court rejected other court rulings that held such ongoing migration of pollution did constitute wholly past violations.  It distinguished this case from a prior ruling that held decomposition of lead shot was not an ongoing violations.  Conn. Coastal Fisherman’s Ass’n v. Remington Arms Co., 989 F. 2d 1305, 1312-13 (2d Cir. 1993).  With regard to the case of lead shot, in contrast to the Kinder Morgan case, the pollutants had already been deposited into a waterway.  Here, pollution was still entering nearby waterways from the historical spill.

Finally, the Court held that violations of the Clean Water Act are not limited to “direct discharges” to a waterway.  The Clean Water Act also covers “indirect discharges,” in this case pollution migrating through groundwater and entering nearby waterways.  However, the Court cautioned, the connection between a point source of pollution and a waterway must be clear (i.e. a “direct hydrological connection”).

As part of the 2008-2009 State budget, Ohio set aside $19.8 million to be used for diesel grants to achieve reductions in air pollution from the transportation sector.  The set aside represents the largest dedicated pool of funds to diesel emission reductions in the Midwest. The grants could be used to pay for pollution control retrofits and anti-idling technology for diesel engines in public and private fleets across the state.

The Ohio Department of Development (ODOD) is charged with implementing the program.  In February 2008 it solicited its first applications.  However, there was a lack of guidance to applicants in the rush to get the program up and running.  As a result, those who still submitted applications did so without knowing whether their application would be deemed sufficient.

Awards were scheduled to be made in early Spring with a second round of applications to follow in late Spring.  Unfortunately, the Federal Highway Administration has raised concerns with the details of the Ohio program that has stopped the program in its tracks.  No announcement has been made regarding the first round of applications and now the second grant round in fiscal year 2008 has been shelved according to ODOD’s website. 

Last year I wrote an op-ed piece in Crain’s Cleveland Business that made the strong case for reducing emissions from the transportation sector

Unfortunately, I couldn’t include a graphic with my article because I think this chart prepared by Ohio EPA sums it all up (click on the chart to see a larger version).  The majority of the pollution causing our ozone problems in Northeast Ohio are from the transportation sector, not area businesses.  With Ohio’s economy hurting, achieving greater reductions from the transportation community is essential to reducing costs for Ohio businesses and allowing them to compete.  Hopefully, the impediments that have stalled this program can quickly be removed as it has become apparent Ohio will likely have one year to spend the $19.8 million.